What is Equity Release
Equity release schemes are products that allow you to access finance that is tied up in your property. This makes them perfect if you have an unexpected expense, or are just in need of more cash. However, they can be more expensive than the alternatives, so need careful consideration.
Types of Equity Release
There are two main types of equity release, lifetime mortgage and home reversion.
Lifetime mortgages are when you take out a mortgage on your main residence while keeping ownership. It is possible to ensure “ring-fence” a portion of your equity, meaning it is safe from mortgaging, perhaps as an inheritance. Furthermore, there are two types of lifetime mortgages. These are Lump Sum lifetime mortgages, and Drawdown lifetime mortgages.
With lump sum lifetime mortgages, you get the whole payment upfront as one large sum of cash. However, with drawdown lifetime mortgages, you get a smaller payment upfront, followed by instalments as and when you need them. A major benefit of drawdown mortgages is that interest is only charged on the funds you have released. This means you could potentially save thousands over the course of the mortgage.
What age do you have to be?
The minimum age you can be when taking out a lifetime mortgage is 55 years old. If you are taking out the lifetime mortgage as a couple, then the youngest applicant has to be at least 55 years old. But, as people are living longer now, the earlier you take it out, the longer the interest will build for, and so the larger the final payment.
How much can you borrow?
The maximum size of the loan you can borrow is normally 60% of the value of the property. However, this is dependant on age and more factors. Essentially, the older you are, the more money you will be able to borrow. Additionally, the minimum value of the property must be no less than £70,000, which is dependant on the lender. To find out how much you can borrow get in touch with an adviser today.
The interest rates for the loan must either be fixed or have a cap for the full duration of the loan, making the interest much more predictable. Additionally, there is a “no negative equity guarantee” present in this product. This means that the final payment may be equal to, but not eclipse, the value of the property. You may also pay the interest monthly to prevent the interest building up. However, the amount you can pay will depend on your mortgage provider and your income.
How much will a Lifetime Mortgage cost you?
With this type you can either pay the interest monthly, or let the interest build over the term. However, if you let it build then your debt will grow over time, perhaps equal the value of the property if left long enough. The loan is paid off in full when you either sell the property, move into care or pass away.
Additionally, there are four main fees that you will have to account for. The first of these is the surveyor’s valuation fee. This just covers the cost of the surveyor carrying out a valuation of the property. This is a requirement for you to be able to take an equity release. The next fee is solicitors fees. You will need a solicitor to take care of all the legal work needed to complete the lifetime mortgage. This normally costs around £1,250, and it is recommended to choose a solicitor who has experience in this field. The Third fee is the application fee to the lender. This fee normally covers legal and set up costs of the mortgage. While the lender decides on the fee, generally it is around £700.
Finally, there may be a fee charged for any advice given to you by your broker.
The second type of equity release that could be available to you is a home reversion scheme. This is when you sell a share of your property in return for a lump sum of cash. While you can sell between 25% to 100% of your property to the provider, this is usually between 30% to 60%. The amount you can borrow is dependant on your age, as well as the lender. You will still be allowed to live in the property, but you do have to pay for all maintenance that needs to be done.
What will Home Revision cost you?
There is a large disparity between the amount you borrow and the percentage of your property the provider gets. For example, your property is worth £200,000, and you want to borrow £50,000. This is 25% of your properties value. But this money could come in exchange for 75% of your property.
This means that the provider will own 75% of the property, worth £150,000, while you only own £50,000. This makes home reversion schemes an extremely expensive way to borrow.
Furthermore, if the value of your property increases in value, then the percentage of your property you own stays the same. This means that if the value increases by 2% a year over 10 years, then the property will be worth £243,798.88. Of this, your percentage will be worth £60,949.72 while the lender owns the rest.
On top of this, there are the fees involved. There is firstly a valuation fee, paid to a surveyor to check the value of your property. Next, there are legal fees to be paid to a solicitor, who will handle all the legal work needed to be completed. Additionally, there are arrangement fees to be paid to the provider and your broker, which covers the cost of setting up the deal.
How old do you have to be?
Home reversion is better suited to older borrowers, normally of the age of 70 and upwards. However, it is possible to get a home reversion when you are younger than 70. The older you are when you start the scheme, the greater the percentage of your property value you could borrow.
If you are not sure which option would be best for you, contact an adviser today who can help you find the best option.
Equity Release with Bad Credit
Many people who are thinking about equity release may wonder if any previous bad credit will impact an equity release application. As with many types of finance, lenders will check your credit report. However, it is quite rare that a poor credit history will affect the equity release application. As with any finance application, it is very important to be honest with the lender. If you try to hide any credit problems, the lender may see this as more damaging than the actual bad credit.
Does the type of bad credit matter?
With equity release mortgages, the lender is not relying on you to make monthly repayments. That is because they add the payments to the loan. Therefore, as affordability is not a factor in the underwriting decision, your credit history and history of making payments on time is far less important;
Some lenders are very relaxed about bad credit whereas others may consider it more important in their lending decision. Hence using a broker who knows the best lender for you can be very beneficial to save you time and abortive costs.
For example, if you have credit card debt, it is unlikely that a lender will factor this in when making a decision on your equity release application.
However, if you have County Court Judgements (CCJs), then this could have an impact on your equity release application. some lenders may require CCJs to be repaid in order to approve equity release applications. In some cases, you may be able to use the equity release to pay the CCJ, As with all loans, your options will completely depend on your circumstances.
As always, if your unsure how your circumstances will affect your borrowing ability, the best course of action will be to talk to an advisor. Remember, equity release allows you to access money tied up in your property, but you are reducing how much of your property you own.
There are a few alternatives available on the market depending on your circumstances. For example, if you own your property outright, you could take a mortgage out on the property, such as a retirement interest-only mortgage (RIO mortgage). If you already have a mortgage in place, then you may also be able to remortgage your property to release some of the equity.
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